After more than a year of wrangling over various mortgage relief proposals, influential state leaders seem close to adopting a plan that Pres. Obama announced Feb. 1. Attorney General Eric T. Schneiderman of New York and California’s attorney general, Kamala Harrishave indicated they are closer to agreement than in the past.
There are two important elements of the plan and details of both have been a subject of fierce disagreement. One, which could be worth about $25 billion, relates to how much money would be allocated to benefit homeowners and the specific relief they would receive. The other involves the power states would have to investigate past practices by banks, oversee future ones and monitor compliance with the plan.
If the plan is adopted, here’s what it would do for homeowners in specific situations.
Mortgage underwater but current with payments. More than 10 million homeowners in the U.S., due to a decline in home prices, owe more on their mortgages than their houses are worth. So even though interest rates have declined, they have been unable to refinance. The latest plan would enable people who have been making loan payments on time to save about $3,000 a year on their mortgage by refinancing with lower-interest loans guaranteed by the Federal Housing Administration.
Mortgage underwater and behind with payments. Depending on how many states sign on to the plan, up to $17 billion would be set aside to reduce principal for homeowners who are behind on their payments and owe more than their houses are currently worth. The plan would not guarantee a minimum amount of mortgage relief by state.
Victims of foreclosure fraud. The plan would provide payments of about $1,800 apiece to approximately 750,000 families that have been the victim of improper foreclosure practices. Since 2010, federal authorities have been investigating banks’ routine electronic notarization of documents being transferred from one financial institution to another as part of the foreclosure process–a practice known as robo-signing.
Compensation is likely to be offered to people who lost their homes between Jan. 1, 2008, and Dec. 31, 2011. They would not be required to give up their right to sue the financial institutions. Banks, among them the five biggest mortgage providers–Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial—want to be relieved of liability for future claims involving robo-signing.
In announcing the plan on Feb. 1, the President said he was “working to turn more foreclosed homes into rental housing.” So far such a plan is not contained in the pending proposal.
by Deborah L Jacobs Forbes 2/6/12
Q: Who is participating in the settlement?
A. All states except Oklahoma. Oklahoma reached its own settlement. The 5 servicers are Bank of America, JPMorgan Chase, Citibank. Wells Fargo and Ally Financia. Smaller ones are expecrted to join later.
Q: Who may get help under the settlement?
A: Borrowers whose loans are owned by the participating banks and those who suffered foreclosures by one of them from 2008 through 2011.
Q: How will $25 billion be spent?
A: The terms include:
•At least $10 billion for reducing principal on loans for borrowers who are either delinquent or at imminent risk of default and are underwater — meaning they owe more on their mortgages than their homes are worth.
•At least $3 billion for refinancing loans for borrowers current on their mortgages and underwater.
•Up to $7 billion will go toward other kinds of assistance, including forbearance of principal for unemployed borrowers, anti-blight programs and short sales.
•$1.5 billion will provide cash payments to borrowers whose homes were sold or taken in foreclosure between Jan. 1, 2008, and Dec. 31, 2011, and who meet other conditions. Officials estimate up to 750,000 borrowers could receive checks for $1,500 to $2,000.
•$3.5 billion will be used to repay public funds lost as a result of servicers' misconduct and to fund housing counselors, legal aid and other public programs determined by attorneys general.
•An additional $1 billion will be paid by Bank of America to resolve a separate federal investigation related to alleged wrongful conduct by the bank and Countrywide involving inflated appraisals of Federal Housing Administration-insured mortgages. Half of that $1 billion will be used to fund a loan modification program for Countrywide borrowers who are underwater on their mortgages. Bank of America acquired Countrywide in 2008.
Q: How large could the settlement get if more servicers
A: Officials estimate the deal could grow to $30 billion if the next nine largest servicers join the agreement.
Q: Will I have to prove I was hurt by a servicer's
A: Probably not. The five servicers will provide a list of people who lost homes during that time frame, and they'll be contacted. Borrowers will likely have to attest to having suffered a loan-servicing abuse.
Q: If I take this payment, could I still sue if I felt I
A: Yes, either as an individual or as part of a class action. It's also possible you could get restitution from a national review of foreclosures underway among 14 large servicers, including these five. That review is being overseen by federal banking regulators.
Specific amounts of compensation have not been announced. No dollar amount has been attached to it. Find more information about that review at this website: www.independentforeclosurereview.com.
Q: Does the settlement resolve all legal claims against
the banks related to mortgages?
A: No. State and federal authorities can pursue criminal actions and also punish wrongful conduct related to the bundling and sale of mortgage loans into investment securities, among other things.
Q: Who will get principal reductions?
A: Borrowers would have to be late on their mortgages or at risk of default. They would also have to be underwater, meaning they owe more on their home than it's worth. And their state and servicer would have to be a participant in the settlement.
Q: Who won't have any chance of a principal
A: That would be most borrowers, including anyone current on a mortgage and people with loans owned or guaranteed by a government entity, including Freddie Mac, Fannie Mae or the Federal Housing Administration. They hold about 56% of existing home loans, says magazine Inside Mortgage Finance. In a recent paper, the Federal Reserve estimated that 12 million mortgages are underwater, and 8.6 million of them are current on payments.
Q: What's in the deal for people who are paid
A: Not much. If they still have high-interest loans above 5.25%, they might benefit from refinancing. Many underwater borrowers can't do that now because they don't have enough equity in their homes.Market researcher CoreLogic says almost 60% of residential mortgages were at interest rates above 5% as of November, even though current interest rates are more like 4%. Borrowers who aren't delinquent could benefit in an indirect way. If the principal reductions help prevent foreclosures, that will mean fewer distressed homes for sale, which could help overall home prices.
Q: How much mortgage relief are we talking about, and to
how many borrowers?
A: Housing and Urban Development Secretary Shaun Donovan says 1 million borrowers could get principal reduction or a refinance through the deal. If that many just got principal reductions, the average would be about $20,000 each. But borrowers are likely to get more or less than that depending on their situation.
The average underwater homeowner owes about $50,000 morethan their home is worth, says economist Mark Zandi of Moody's Analytics.
Q: Will I be able to apply for principal reduction or
A: There won't be a standard application process. But you'll be able to request it from your servicer if you're eligible to do so.
Q: When could modifications and payments begin?
A: That's hard to say. But the agreement requires servicers to fulfill their obligations within three years and gives them incentives to provide relief within 12 months. They must fulfill 75% of their obligations within the first two years. Those who miss settlement targets and deadlines will have to pay cash penalties.
Q: Will the principal reduction be a big boost to the
A: Probably not, says Capital Economics economist Paul Diggle. Borrowers collectively owe $700 billion more on their mortgages than their homes are worth. The principal forgiveness is "not going to be enough to generate a significant and sustained housing market recovery," Diggle says.
Q: How else will the settlement affect homeowners not in
A: In addition to the financial penalties, there are new standards governing future loan servicing and foreclosures. The standards are expected to be tougher than past ones and should improve consumer experiences. "In many ways, that's just as important as the money," says Ira Rheingold, director of the National Association of Consumer Advocates.
Q: What will servicers have to do differently?
A: They must make foreclosures a last resort. Servicers will be more restricted in their ability to carry out a foreclosure while someone is pursuing a loan modification. They will also be expected to adhere to more consistent time frames, for instance, as to how long they have to inform borrowers of decisions regarding loan modifications. The settlement also details other requirements that servicers must follow to ensure records are kept accurately and that legal procedures are followed precisely. They must also conduct regular reviews to make certain of both.
Q: Who'll check up on servicers?
Q: Will this settlement affect home prices?
A: Maybe. With a settlement — and clear servicing standards — some economists say servicers will pick up the pace at which they foreclose on delinquent borrowers . More foreclosures on the market could drive home prices lower in the short run, says Zillow economist Stan Humphries.